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Summary of Sustainable Transitions: Unleashing the Power of Treasury

Core Content

This report, Sustainable Transitions: Unleashing the Power of Treasury, explores the evolving role of corporate treasury in driving sustainability and ESG (Environmental, Social, and Governance) strategies. It argues that treasury is not just a financial function but a strategic enabler that can significantly influence a company’s sustainability journey and broader business ecosystems. The report is based on two proprietary analyses conducted by Citi GPS in collaboration with Citi Services.

Main Points

1. The Strategic Role of Treasury in Sustainability

• Treasury operations are becoming more central to corporate sustainability due to their visibility across business ecosystems and supply chains.
• Sophisticated treasury functions are correlated with higher levels of corporate engagement in net zero commitments and sustainability objectives.
• Treasury can support sustainability by managing risks, improving access to capital, and driving systemic change through innovative financial instruments.

2. Sustainability as a Critical Megatrend

• Sustainability is at the core of current and future global challenges and opportunities, including climate change, inequality, energy security, and technological transformation.
• It is not just a compliance or risk management issue but a driver of long-term economic and social resilience.
• The World Economic Forum (WEF) 2024 Global Risks Report highlights that extreme weather, societal polarization, and the cost-of-living crisis are among the most pressing global risks, all of which are tied to sustainability themes.

3. The Corporate Sustainability Journey

• The report outlines a structured approach to corporate sustainability, from defining purpose and strategy to implementation and reporting.
• Treasury should be involved in all stages of this journey, especially in the early phases, to provide insights on materiality, KPIs, supply chain dynamics, and business ecosystem impacts.

4. Supply Chain Risks and Opportunities

• Many large corporations have set science-based net zero targets, but their supply chains often lag behind.
• This mismatch creates risks of supply chain lock-out and highlights the need for treasury to engage in sustainable supply chain finance (SSCF) and other financial tools to align suppliers with corporate sustainability goals.
• The analysis covers 1,598 of the largest companies across 17 industries and their 65,805 suppliers, showing significant misalignment between buyers and suppliers in net zero targets.

5. Sustainable Finance Solutions

• Treasury can leverage various sustainable finance instruments such as green bonds, social bonds, KPI-linked instruments, and carbon credits.
• These tools can help mitigate risks, improve long-term resilience, and align financial strategies with sustainability objectives.

6. Lessons from History

• Historical events, such as the 1973 energy crisis, demonstrate that short-term disruptions often accelerate long-term sustainability transitions.
• For example, the EU’s response to the Black Sea conflict led to a short-term increase in coal usage but also accelerated the long-term energy transition through policies like the Repower EU plan.

7. Tipping Points and the Risk of Stranded Assets

• Tipping points in sustainability transitions occur when the direction of change becomes so clear that investing in outdated technologies or assets becomes risky.
• These tipping points often lead to complete shifts rather than partial transitions, as seen in the move from steam trains to diesel/electric trains or from analog cameras to digital ones.

8. Financial Performance and Sustainability

• There is a growing body of evidence showing that companies with higher ESG ratings enjoy lower cost of capital, including future cost of capital.
• This underscores the importance of integrating sustainability into corporate strategy and financial planning.

Key Information

Proprietary Research Findings

• Treasury Sophistication and Net Zero Alignment: Companies with more advanced treasury operations are more likely to have science-based net zero targets.
• Supply Chain Misalignment: A significant gap exists between buyer and supplier alignment with net zero targets, particularly in tech, communications, industrials, and healthcare.

Action Items for Corporate Treasury

• Engagement in Strategy: Treasury should be involved in defining and executing the company’s sustainability strategy.
• Risk and Opportunity Assessment: Identify and manage supply chain risks and leverage opportunities in sustainable finance.
• Metrics and KPIs: Use sustainability metrics to align financing and reporting with strategic objectives.
• Collaboration: Work with key stakeholders including regulators, counterparties, and financing partners to drive systemic change.

Key Stakeholders and Roles

• Jennifer Wainer: Head of Sustainability & ESG for Treasury & Trade Solutions, driving client-centric sustainability strategies.
• Jason Channell: Head of Sustainable Finance, leading research and thought leadership on sustainability topics.
• Ying Qin: Global thematic analyst, focusing on ESG and sustainability-related topics.
• Andrea Fleming: Senior associate in sustainability and responsible development, with expertise in ESG research and quantitative economics.
• Elizabeth Curmi: Head of Climate Finance & Energy Transition, with a focus on environmental economics and sustainable finance frameworks.

Conclusion

• Treasury is uniquely positioned to influence sustainability outcomes due to its role in financing, liquidity, and supply chain management.
• Engaged treasury operations can help companies navigate the complexities of sustainability, reduce risk, and capture growth opportunities.
• The report emphasizes the need for early and strategic treasury involvement in sustainability initiatives to ensure alignment, resilience, and long-term success.